Convinced that the high-grade Esquel project in Argentina has the potential to be a company-maker like its El Peon mine in Chile,
Meridian is offering 0.1886 of a share in exchange for each Brancote share in a deal worth around US$300 million. Based on an April 3 closing price of US$13.56 per Meridian share, the offer values Brancote at 1.78. This represents only a 2% premium over its close on the day prior to the announcement, or a 17.5% premium over its close of 1.52 on March 7, the day before Brancote reported it was in preliminary discussions to be bought.
The board of Brancote unanimously recommends that its shareholders accept the proposed offer. “Through this merger, Brancote shareholders will have the opportunity to benefit from Meridian’s proven expertise in mine development, operations and exploration,” says Brancote Chairman Richard Prickett. “In addition, this merger will enable Brancote shareholders to participate in Meridian’s success at El Peon. Meridian also brings to Brancote the financial resources to enable development of Esquel.”
Brancote shareholders will also enjoy more trading liquidity, adds Brian Kennedy, president and chief executive officer of Meridian.
Meridian Gold’s main assets are El Peon, a wholly owned underground mine, and a 30% stake in the Jerritt Canyon mine in northern Nevada. The company’s Beartrack mine, near Salmon, Idaho, ceased operating in 2000. In 2001, the company produced a total of 434,585 oz. gold from its operations at a cash cost of US$83 per oz. and a total production cost of US$138 per oz. El Peon alone accounted for 318,012 oz. gold and 4.7 million oz. silver at a cash cost of US$43 per oz., net of silver credits, and a total cost of US$94 per oz.
A 2,000-tonne-per-day underground mining and milling operation, El Peon is 160 km southeast of Antofagasta. It entered production in late 1999 at a capital cost of US$77 million and paid back its investment in just 15 months to become free of hedging. Proven and probable reserves at the end of 2001 stood at 1.8 million oz. gold and 29.5 million oz. silver contained in 4.7 million tonnes grading 11.8 grams gold and 198 grams silver per tonne.
Meridian generated almost US$38.7 million (or 51 per share) in net income in 2001 on the back of El Peon. During the fourth quarter of 2001, operations provided a solid cash flow of US$18.3 million. At year-end, Meridian held a cash balance of US$97.3 million, versus US$63.2 million at the end of 2000, and no debt.
Meridian has locked up the support of Brancote’s directors and biggest shareholder, representing about 19% of Brancote’s shares. Brancote currently has 89.5 million shares outstanding on a fully diluted basis. As part of this transaction, the London-based junior will acquire full ownership of Esquel by buying the remaining 23.6% minority interest held by its Argentine partners; it would make this purchase with Brancote shares, provided Brancote shareholders approved the proposed merger. This would result in Brancote’s having 116.9 million issued shares. The Argentine partners will continue to hold a 40% interest in a surrounding package of properties.
Should any competing offers emerge, Meridian will have the right to match that offer and is entitled to a break fee of US$1.5 million. Principal conditions of the offer include a 90% acceptance.
Esquel
The Esquel project comprises 433 sq. km in the Chubut province, close to the Chilean border in the foothills of the Patagonia region. It centres on a near-surface, high-grade, low-sulphidation, epithermal gold-silver vein system that extends over 2.4 km. The project is 10 km north of the provincial town of Esquel at an elevation of 1,200-1,400 metres. The town of 30,000 offers national grid power, gas supply, abundant water and road access.
The core area is at the southern end of Cordon Esquel and measures 3.5 km north-south by 1.5 km east-west. The western boundary is marked by the north-south-striking Antonia vein system, whereas the Pinnacles-Ungoliant veins define the eastern boundary. The massive vein system containing Galadriel, Galadriel Sur, Football Field and Julia cuts diagonally across the core area in a northeasterly direction.
In addition to these major veins, there are numerous others, both singular and in swarms, throughout the core area.
Brancote holds a 76.4% interest in four packages of concessions totalling 1,800 sq. km through its ownership in the Argentine company Minera El Desquite (MED). MED first began acquiring ground in the Cordon de Esquel range, just northeast of the townsite, shortly after it was formed in 1997. Preliminary exploration had revealed the presence of high-grade, gold-and-silver-bearing epithermal vein systems within a 600-to-1,000-metre-wide corridor that has been traced over a distance of 20 km by reconnaissance mapping and sampling.
MED added to its position in 1998 by acquiring the neighbouring La Joya Del Sol gold property from Sunshine Mining & Refining. A year earlier, Sunshine had completed shallow drilling on four of 16 known veins, resulting in a preliminary resource estimate of 1.1 million tonnes grading 5.8 grams gold and 39.5 grams silver, equivalent to 209,000 oz. gold and 1.4 million oz. silver. The original discovery at La Joya Del Sol is just 3 km north of the Galadriel and Elena veins. La Joya Del Sol is viewed as having considerable upside.
MED also acquired a block of concessions, containing the past-producing Huemules gold mine in the Cordon de Rivadavia range some 25 km northwest of Esquel.
In March 1999, Brancote and its Argentine partners approved an initial US$2.5-million exploration and drilling program targeting the Galadriel and Elena vein system. At the end of 1999, exploration work had defined 15 vein systems, compared with five at the beginning of the year.
Prefeasibility
By the end of a fourth round of drilling, in June 2001, MED had completed some 42,000 metres at Esquel. Pincock, Allen & Holt estimated a measured, indicated and inferred resource totalling 3.8 million oz. gold and 6.9 million oz. silver in 19.3 million tonnes grading 6.06 grams gold and 11.1 grams silver, based on a cutoff grade of 1 gram gold per tonne.
A prefeasibility study in November 2001 envisioned an open-pit mine and conventional processing plant designed to produce 500,000 oz. gold per year using conventional gravity concentration and the carbon-in-leach (CIL) method at the daily rate of 5,000 tonnes of ore (or 1.8 million tonnes per year). Recoveries were projected at 89.5% for gold and 73% for silver; capital costs, at US$132 million, including US$41 million for contingencies and indirect charges.
Open-pit reserves contain about 2.8 million oz. and 4.8 million oz. silver within a diluted 11.5 million tonnes grading 7.59 grams gold and 13.06 grams silver at an overall stripping ratio of 9.9-to-1.
Brancote resumed exploration and infill drilling on the project at the beginning of October. The aim was to upgrade some 494,000 oz. contained in inferred resources while testing new vein systems near existing resources. A 4,200-metre program of reverse-circulation drilling was also completed at La Joya del Sol to confirm previous drilling.
Richard Lorson, Meridian’s vice-president of exploration, says Esquel exceeds more than 3 million oz. gold in a resource averaging a grade of 8.5 grams per tonne, based on a higher cutoff of 1.5 grams gold. Most of the veins are exposed at surface. Locally, the veins are up to 20 metres wide, but associated stockwork can further expand these widths to as much as 40 metres. Lorson expects stripping ratios will be in the range of 9-to-1.
Lorson is optimistic about the potential to continue to expand the resource at Esquel. He noted that the entire Galadriel Sur-Julia vein system remains open to depth, while Antonio, Elena Norte, Elena Sur and Ungoliant are all open along strike and to depth. Brancote’s recent drilling highlights the po
tential of Ungoliant, which intercepted 9 metres of 34.3 grams gold and 8 metres of 15.8 grams gold.
Meridian sees Esquel producing more than 300,000 oz. gold annually at a throughput rate of 3,000 tonnes per day over a 10-year life. Cash costs are estimated at less than US$100 per oz.; total costs, at less than US$185 per oz. The capital cost is expected to be about US$90 million, spread over a 12-month construction schedule with startup aimed for 2004. Meridian believes it can conservatively achieve gold recoveries in the mid-80% range using CIL processing.
In the short term, Meridian will complete a feasibility study of Esquel by the end of 2002.
“We believe Esquel is another low-cost project like El Peon . . . and will add easier-to-develop open-pit reserves to our portfolio,” says Kennedy. “The new Meridian will be a better Meridian. The combined companies will have reserves and resources of more than 8 million oz., annual production will increase by 75% to 700,000 oz. by the year 2004, cash costs will be less than US$100 per oz., and total costs will remain among the lowest in the industry at US$185 per oz. We believe Meridian and Brancote neatly fit together to create a new chapter in the Meridian story. This is a classic combination where the whole exceeds the sum of the parts.”
For 2002, Meridian expects to produce 300,000 oz. gold from El Peon at a cash cost of US$50 per oz., and 100,000 oz. from its share of Jerritt Canyon at a cash cost of US$215 per oz. The company currently has 75.9 million shares outstanding.
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